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Global equity markets have displayed remarkable strength in the face of the natural disasters and man-made crises seen so far this year
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Further strength, in the short term at least, seems likley, but Walter Scott remain cautious
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A focus on those companies which can grow despite the current headwinds remains the key
Francis Sempill, a member of the team managing the BNY Mellon Long Term Global Equity Fund, looks at the outlook for global equity investing following an eventful first four months of the year.
"Few could have predicted the natural disasters and man-made crises we have witnessed so far this year," says Sempill, "and even with the benefit of hindsight, fewer still could have expected such resilience in global equity markets in the face of these challenges. At the start of the year our mood might have been best characterised as one of ‘cautious optimism'. Contrary to the message that has been conveyed by many of the major equity markets over the first four months of the year, our mood remains largely unchanged," he adds.
"In a seemingly blinkered belief in a corporate-led recovery, and fuelled by still abundant liquidity, equity markets are making a not-insignificant bet. Many of the major developed economies continue to show early signs of recovery, but for this recovery to continue will require a meaningful increase in consumption," he says. "Add to this the challenges facing so many governments in managing deficit levels beyond all historical norms, and it would be easy to paint a less than optimistic picture of the future.
"Despite this backdrop, there is clearly momentum, confidence and liquidity-driven appetite within equity markets, and so," he continues, "barring any new and serious crisis, and putting fundamentals to one side, we may well see further strength in the short term at least. Should markets succumb to the myriad of geopolitical, economic and market risks, opportunities, from our perspective as long-term investors, will inevitably present themselves," adds Sempill.
Strength in the face of adversity
"The liquidity-fuelled confidence that currently exists within markets appears to be backed by an enthusiastic belief in corporate recovery," he explains. "Through our analysis and day-to-day conversations with company management, in part, we would concur with the market; there will be corporate growth. However, we do not share the market's apparent belief that there will be universal corporate growth. Many companies have delivered impressive productivity gains and sound top-line growth despite the circumstances, but there is simply not sufficient demand to drive the broad-based growth that the market appears to be expecting," Sempill adds.
For the team at Walter Scott, it is therefore a matter of identifying companies capable of sustainable growth and wealth generation despite the tough economic environment with many corporates, as well as consumers facing both inflationary pressures and the impact of tough austerity measures. He continues, "Companies with leading market positions, sound finances and growing cash reserves - the sort of company that would meet our investment criteria - are better positioned for growth than most. Good companies can prosper in good times and bad," Sempill concludes, "hence our optimism for the companies in which we invest."
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